How a Basic Income would reduce taxation

The efficiency of a Basic Income would mean that less tax revenue would be required to support redistribution of wealth than the current tax and benefits system

The most common criticism of a Basic Income is that it would be too expensive. “We simply can’t afford it,” “It would require a huge increases in taxes,” and “supporting everyone would cost too much,” are common responses from those who oppose a basic income. But they fail to take into account the cost of the current systems of welfare, taxation and general income redistribution.

In the UK at the moment, the government taxes personal income to the tune of £233 billion. It then spends the vast majority (£224bn) of that money on welfare payments of one kind or another.

If we were to introduce a Basic Income of £7,200 for each adult, what would the cost of this be? At first glance, it seems easy enough to calculate – simply multiply the payment by the number of adult citizens in the UK, plus pensioners living abroad (who would be eligible) of 53 million, which would make it £381.6 billion. This is clearly a huge increase on the cost of benefits outlined above (£224bn) and is what leads to the cry that it would require a huge increase in taxation.

However, if the Basic Income payments were offset against people’s tax liabilities, something interesting happens – the amount that we actually need to pay out becomes much smaller, as does the amount we need to collect.

If we assume a flat rate of tax of 35% across all the forms of income counted in the figures above, but subtract the Basic Income from people’s liabilities, only around 55% of income earners will pay any tax at all. The remaing 45% actually receive payment from the government because their tax bill is less than the Basic Income of £7,200.

Here are 3 examples:

Person 1 earns £20,571 per year across all forms of income. Their tax bill is therefore 35% of 20,571, which is £7,200. At the same time, they are eligible for a Basic Income of £7,200 from government. These two numbers cancel each other out, so they receive £0 from government and pay £0 in tax. Their take-home pay is £20,571 (currently, their take home pay is £17,155)

Person 2 earns just £10,000 (approx 30 hours per week at minimum wage level). Their tax bill is 35% of 10,000, which is £3,500. Their Basic Income entitlement is £7,200, so their net payment is +£3,700 (Basic Income minus their tax liability). Their take-home pay is therefore £13,700. (currently, their take home pay is £9,767)

Person 3 earns £50,000 per year. Their tax bill is 35% of 50,000, which is £17,500. Their Basic Income entitlement is £7,200, so their net payment is +£10,300. Their take-home pay is £39,700 (currently it’s £36,467)

As we can see from these examples, it is only Person 3 who pays any tax at all (£10,300), while only Person 2 actually receives payment (of £3,700) from the government.

So instead of collecting a total of £28,200 from these 3 people (the total of their tax liabilities) and then paying them a total of £21, 600 in Basic Income (3 x £7,200), it simply balances them out

The net amount is the same – government receives a net total of £6,600 in both situations, but the first approach cuts out the bulk of the administration, and avoids the situation where funds are flying back and forth (which happens in the current system).

Interestingly, under the current system, the government collects a total of £16,982 from these 3 people and returns most of it in terms of welfare payments in a variety of indeterminate ways.

So to compare:

Currently, gov’t collects taxes of £16, 982 and pays out about £16,500 in multiple benefits

Under a basic income system, it could collect tax of £28,200 and pay out £21,600 in Basic Income and a further £6,000 in other benefits.

But by setting Basic Income against Flat Tax liabilities, it will collect just £10,300 and pay out Basic Income payments of £3,700, plus the remainder in other benefits payments.

It is the simplicity of Basic Income and the Flat Tax that permits this. They are both equal, universal and simple to calculate and administer.

So what does this mean on a national scale?

Well, in the UK a flat tax on all personal income of 35% would raise £430 billion (total personal income is approx £1,230bn -calculated from ONS Personal Income Percentiles 2014). The total cost of the Basic Income of £7,200 per person would be £381bn, and the difference would be required to pay additional benefits to Pensioners, the Disabled, Children and Lone Parents. Critics would argue that this is a huge increase in taxes and benefits payments compared with the current situation (see table above).

But in reality, the amount raised in tax would fall to £167 billion (that’s £66 billion less than now), and the amount paid out in Basic Income + Retained Benefits would be £170 (£54 billion less than now). The full details are in Table 1 in the appendix.

There are a number of reasons for this, but the main one is that we will stop collecting taxes from people on low incomes, only to give them some or all of it back in the form of welfare programmes/benefits (which we also have to pay to administer). Under these Basic Income/Flat Tax arrangements, those earning less that £20,571 will not pay any tax, while those who earn more will mostly pay less overall.

In summary

Current Tax and benefits system

With Basic Income/Flat tax approach

Tax raised

£232bn

£167bn

Benefits paid out

£224bn

£170bn

So those who claim that a Basic Income would be too expensive need to take a look at just how inefficient the current tax and benefit systems are. They also need to accept that because taxes raised in this way are paid back to citizens via the Basic Income, for most people who currently pay tax, this represents a very simple and efficient tax cut or transfer payment. Therefore, the cost to them via the tax system would be either zero, or less than it currently is.

So no more trying to justify higher taxes or complex schemes of administration. Let’s be clear that Basic Income is a very effective way to reduce the nation’s tax bill!

A well administered Basic Income scheme should reduce taxation, reduce the interference of government and empower individuals who, up until now, have relied upon it.

Assumptions

The Basic Income would apply to all UK citizens resident in the UK, and UK pensioners resident abroad.

Tax would apply to all income of those resident in the UK including non-citizens.

Non-citizens would not receive a Basic Income, but would not be taxed on first £20,571 of income so would be treated equally within the tax system

The Basic Income would be less for 16-21 year olds and more for those aged over 65. The amounts outlining the changes in cost of the Basic Income as a result of this are at in table 2 in the appendices

I have not included in this calculation other savings a Basic Income might bring, such as the reduction in admin costs, reductions in poverty, increases in entrepreneurship, reductions in crime etc. The financial benefits of these things could be huge, but even if we assume it brings about no further social or economic change, a Basic Income could at the very least reduce the required tax take.

Appendices

Table 1: Personal income by percentile, with a flat tax of 35% and a Basic Income of £7,200 per year.The last column shows how much the scheme would cost government (or actually what it would raise for gov’t: the minus numbers are basic income payments made for each percentile, net of tax; the positive numbers are the tax amount raised from each percentile)

Percentile

Personal Income (£)

Tax Paid (35% -BI) (£)

Take-home pay (£)

Tax/% of income

Total Govt revenue (£bn)

Non-earners

0

0

0

-100

-72

1

10,098

-3640.7

13,739

-36.1

-1.38

2

10,400

-3535

13,935

-34

-1.34

3

10,712

-3425.8

14,138

-32

-1.3

4

11,024

-3316.6

14,341

-30.1

-1.26

5

11,232

-3243.8

14,476

-28.9

-1.23

6

11,440

-3171

14,611

-27.7

-1.2

7

11,648

-3098.2

14,746

-26.6

-1.18

8

11,856

-3025.4

14,881

-25.5

-1.15

9

12,064

-2952.6

15,017

-24.5

-1.12

10

12,272

-2879.8

15,152

-23.5

-1.09

11

12,480

-2807

15,287

-22.5

-1.07

12

12,688

-2734.2

15,422

-21.5

-1.04

13

12,896

-2661.4

15,557

-20.6

-1.01

14

13,104

-2588.6

15,693

-19.8

-0.98

15

13,312

-2515.8

15,828

-18.9

-0.96

16

13,520

-2443

15,963

-18.1

-0.93

17

13,728

-2370.2

16,098

-17.3

-0.9

18

13,936

-2297.4

16,233

-16.5

-0.87

19

14,144

-2224.6

16,369

-15.7

-0.85

20

14,456

-2115.4

16,571

-14.6

-0.8

21

14,664

-2042.6

16,707

-13.9

-0.78

22

14,872

-1969.8

16,842

-13.2

-0.75

23

15,080

-1897

16,977

-12.6

-0.72

24

15,392

-1787.8

17,180

-11.6

-0.68

25

15,600

-1715

17,315

-11

-0.65

26

15,808

-1642.2

17,450

-10.4

-0.62

27

16,120

-1533

17,653

-9.5

-0.58

28

16,328

-1460.2

17,788

-8.9

-0.55

29

16,536

-1387.4

17,923

-8.4

-0.53

30

16,848

-1278.2

18,126

-7.6

-0.49

31

17,056

-1205.4

18,261

-7.1

-0.46

32

17,368

-1096.2

18,464

-6.3

-0.42

33

17,576

-1023.4

18,599

-5.8

-0.39

34

17,888

-914.2

18,802

-5.1

-0.35

35

18,096

-841.4

18,937

-4.6

-0.32

36

18,408

-732.2

19,140

-4

-0.28

37

18,720

-623

19,343

-3.3

-0.24

38

18,928

-550.2

19,478

-2.9

-0.21

39

19,240

-441

19,681

-2.3

-0.17

40

19,552

-331.8

19,884

-1.7

-0.13

41

19,864

-222.6

20,087

-1.1

-0.08

42

20,072

-149.8

20,222

-0.7

-0.06

43

20,384

-40.6

20,425

-0.2

-0.02

44

20,696

68.6

20,627

0.3

0.03

45

21,008

177.8

20,830

0.8

0.07

46

21,424

323.4

21,101

1.5

0.14

47

21,736

432.6

21,303

2

0.18

48

22,048

541.8

21,506

2.5

0.23

49

22,360

651

21,709

2.9

0.27

50

22,776

796.6

21,979

3.5

0.33

51

23,088

905.8

22,182

3.9

0.38

52

23,400

1015

22,385

4.3

0.43

53

23,816

1160.6

22,655

4.9

0.49

54

24,128

1269.8

22,858

5.3

0.53

55

24,544

1415.4

23,129

5.8

0.59

56

24,960

1561

23,399

6.3

0.66

57

25,376

1706.6

23,669

6.7

0.72

58

25,792

1852.2

23,940

7.2

0.78

59

26,208

1997.8

24,210

7.6

0.84

60

26,624

2143.4

24,481

8.1

0.9

61

27,144

2325.4

24,819

8.6

0.98

62

27,560

2471

25,089

9

1.04

63

28,080

2653

25,427

9.4

1.11

64

28,600

2835

25,765

9.9

1.19

65

29,016

2980.6

26,035

10.3

1.25

66

29,536

3162.6

26,373

10.7

1.33

67

30,160

3381

26,779

11.2

1.42

68

30,680

3563

27,117

11.6

1.5

69

31,200

3745

27,455

12

1.57

70

31,824

3963.4

27,861

12.5

1.66

71

32,448

4181.8

28,266

12.9

1.76

72

33,176

4436.6

28,739

13.4

1.86

73

33,800

4655

29,145

13.8

1.96

74

34,528

4909.8

29,618

14.2

2.06

75

35,256

5164.6

30,091

14.6

2.17

76

35,984

5419.4

30,565

15.1

2.28

77

36,712

5674.2

31,038

15.5

2.38

78

37,544

5965.4

31,579

15.9

2.51

79

38,480

6293

32,187

16.4

2.64

80

39,416

6620.6

32,795

16.8

2.78

81

40,352

6948.2

33,404

17.2

2.92

82

41,392

7312.2

34,080

17.7

3.07

83

42,328

7639.8

34,688

18

3.21

84

43,160

7931

35,229

18.4

3.33

85

44,200

8295

35,905

18.8

3.48

86

45,552

8768.2

36,784

19.2

3.68

87

47,008

9277.8

37,730

19.7

3.9

88

48,568

9823.8

38,744

20.2

4.13

89

50,440

10479

39,961

20.8

4.4

90

52,624

11243.4

41,381

21.4

4.72

91

55,224

12153.4

43,071

22

5.1

92

58,240

13209

45,031

22.7

5.55

93

62,088

14555.8

47,532

23.4

6.11

94

66,976

16266.6

50,709

24.3

6.83

95

73,216

18450.6

54,765

25.2

7.75

96

81,952

21508.2

60,444

26.2

9.03

97

94,952

26058.2

68,894

27.4

10.94

98

114,400

32865

81,535

28.7

13.8

99

165,360

50701

114,659

30.7

21.29

Total personal income in UK

1,229,160

Net Gov’t Revenue (total from percentile 1 -99)

63.15

It might be easier to understand it in a chart (x axis is percentage of income paid in tax, y axis is percentiles of income earners, poorest 1% to richest 1%):